Yahoo, Google Team Up on Search Ads

On the heels of a failed takeover bid by Microsoft, Yahoo announced a joint agreement today with search engine leader Google that would allow the beleaguered company to run search ads supplied by its biggest longtime competitor.

"We believe that the convergence of search and display is the next major development in the evolution of the rapidly changing online advertising industry," Yahoo CEO and co-founder Jerry Yang said in a statement. "Our strategies are specifically designed to capitalize on this convergence and this agreement helps us move them forward in a significant way."

Under the non-exclusive agreement, which applies only in North America and Canada, Yahoo will choose under which search queries and on what pages the Google ads will appear. Yahoo will still use ads provided by its in-house ad service Panama, as well as ads from other providers. Ultimately, the cash-strapped company expects the agreement to generate an extra $800 million in revenue annually.

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"I believe [the deal] puts Yahoo on a faster track to creating value," Yang said on a conference call today.

Yahoo President Susan Decker declined to outline how much revenue it would split with Google as a result of the deal.

The announcement came mere hours after Microsoft and Yahoo both said that the Seattle-based company would no longer be pursuing Yahoo, either in whole or partially. In its latest bid, Microsoft offered to buy Yahoo for $33 per share, or $47.5 billion. In the conference call, however, Yahoo stressed that the deal with Google did not rule out any future acquisition deals with Microsoft or other companies.

Antitrust Issues?

Although Yahoo and Google said that they would allow the Department of Justice to review the ad deal for three months before implementing it, Yang stressed that because the deal is not a merger, there were no antitrust issues.

"We see this as a really good, open, flexible deal for Yahoo," Yang told investors. "It helps Yahoo be strengthened as a long-term competitor."

The deal is already raising eyebrows with politicians and analysts, however.

"We will closely examine the joint venture between Google and Yahoo announced today," Sen. Herb Kohl, D-Wisc., chairman of the Senate Antitrust Subcommittee, said in a statement today. "This collaboration between two technology giants and direct competitors for Internet advertising and search services raises important competition concerns. The consequences for advertisers and consumers could be far-reaching and warrant careful review, and we plan to investigate the competitive and privacy implications of this deal further in the Antitrust Subcommittee."

According to Silicon Valley-based tech analyst Rob Enderle, the deal will likely attract the eyes, if not the ire, of either the Federal Trade Commission or the Department of Justice.

"Google is so close to being a monopoly it isn't even funny," Enderle said. "Because Google is so dominant it likely pushes Google over the top."

In recent years, Microsoft has largely expanded its presence on Capitol Hill, according to Enderle. That presence will likely result in strong pressure to investigate the deal, he said.

"Expect a full-court press with all of Microsoft's new government resources focused on this deal," he said. "Because Google is so large, they are vulnerable. This could be a tipping point for Google where the DOJ or FCC could be worried enough about them to start investigating them and clearly the announcement anticipates that."

Despite the competition issues, Enderle believes the decision will be good for the company in the long term, but will hurt it in any future proxy fights.

"Ironically, this is likely what Yahoo should have done some time ago, but it showcases the failure of the current administration and this is a really bad time for that," he said.

TechCrunch editor Michael Arrington, who broke the story ahead of the official announcement today, believes the deal makes Yahoo less competitive, not more.

"Outsourcing their business in this way, even though it looks like it's going to start small and move up — it really gets them out of the search marketing game entirely and they'll never be able to move up in that world now," he said.

Arrington takes issue with the deal for a whole other reason: He believes it harms the Internet.

"Handing Google or any provider a search market monopoly is bad for the Internet because so much money flows through search," Arrington said, noting that many small businesses use Google ads on their site to stay in business.

"Without real competition Google will keep the monster share of that revenue and give out just enough to get people to agree to it. With Microsoft and Yahoo competing for those publishers, those margins tend to shrink. I think it's really, really bad for the no. 1 and 2 players to combine in this way."